Loading the lesson
Loading the lesson
Search AllRounder.ai
Search the courses, subjects, tracks, games and features, or jump straight to a page.
Search the courses, subjects, tracks, games and features, or jump straight to a page.
Learn it your way
A short class with Sarah and her students. The other ways are under More.
Sign up free to listen. Transcripts are free to read.
Today, we will discuss how to calculate the Equivalent Annual Cost or EAC. Can anyone tell me what EAC represents in cost analysis?
Isn't it the annual cost of owning and operating an asset?
Exactly! EAC helps us spread out all costs over the equipment's lifespan. Now, for the third year, we start with the purchase price—can you recall how much that was?
It's 3,500,000 rupees.
Great! Now, applying the USCRF for year 3 at 15%, which is 0.4380, we can calculate the EAC. Can anyone show me the calculation?
It's EAC equals 0.4380 multiplied by 3,500,000, which gives us 1,533,000 rupees!
Perfect! So the EAC for our purchase price in year 3 is 1,533,000 rupees.
Let's now discuss operating costs. The first-year operating cost was given as 113,200 rupees. How do we find its present worth?
We use the present worth factor!
Correct! For year 1 with an interest rate of 15%, the present worth factor is 0.8696. Can someone calculate the present worth?
It's 98,438.72 rupees!
Excellent! Now, to find its EAC, which uniform series capital recovery factor do we use for year 1?
It’s 1.15!
So, how would we calculate the EAC for the operating cost?
We multiply 1.15 by 98,438.72.
Exactly! The calculation gives us approximately 113,204.53 rupees as the EAC of operating costs for year 1.
Now let's find the EAC of the operating and maintenance cost for year 3. What do we do first?
We need to calculate the present worth of operating costs for year 3?
Correct! The given operating cost for year 3 is 538,315.57 rupees. What factor do we use?
The capital recovery factor for year 3, which is 0.4380!
Exactly. Can someone show how to arrive at the EAC for this operating and maintenance cost?
It’s 0.4380 times 538,315.57, which equals 235,782.22 rupees.
Great job! You've just calculated the EAC for operating and maintenance costs in year 3.
Now that we have EAC for the purchase price and operating costs, how do we find the total equivalent annual cost?
We add the EAC of purchase price to the EAC of operating costs and then subtract the salvage value!
Exactly! So can anyone tell me what the total EAC would be if the salvage value is taken into account?
The total would be 1,533,000 plus 235,782.22 minus the resale value.
How do we find that resale value?
You would calculate it similarly by converting any future cash inflows of the salvage value into present value and then to EAC.
Oh! Got it! This helps to identify the economic life of the machine.
Exactly! That brings us to understanding the optimum time to replace the machine based on EAC calculations!
Refers to the method of recovering the initial investment cost over the useful life of an asset.
A calculation used to determine how much future cash flows are worth today.
The estimated resale value of an asset at the end of its useful life.
To calculate EAC with glee, remember USCRF times cost A-B-C!
Once a machine was bought for much strife, finding EAC gave it new life, with costs all aligned, its future defined, through each year’s given financial knife.
P.O.S.S.E. - Present Worth, Operating cost, Salvage value, Sum, EAC helps with machine life.
EAC: Every Asset Cost is an annual calculation for our spending!
Term
What is EAC?
Click to flip
Term
How to calculate EAC?
Click to flip
Term
Define Present Worth.
Click to flip
Term
What does USCRF stand for?
Click to flip
The annual cost of owning and operating an asset over its entire life.
A factor used to convert present worth into annual payments.
The current worth of a cash flow that occurs in the future, discounted back to the present.
Expenses related to the operation of an asset or equipment.
Costs incurred to maintain an asset in working condition.
This section covers the process for calculating the equivalent annual cost (EAC) for the third year considering purchase, operating, and maintenance costs.
This section explains how to calculate the Equivalent Annual Cost (EAC) for the purchase price, operating, and maintenance costs in the third year. It discusses steps to find each cost's present worth and uses uniform series capital recovery factors to convert these to EAC.
In this section, we detail the methodology for calculating the Equivalent Annual Cost (EAC) specifically for the third year, focusing on various cost components associated with a capital project. The process begins by determining the purchase price of 3,500,000 rupees and uses a uniform series capital recovery factor (USCRF) formula where
EAC = USCRF × Purchase Price.
Here, the calculated USCRF for year 3 at an interest rate of 15% is 0.4380, leading to an EAC of approximately 1,533,000 rupees.
Next, we transition to operational and maintenance costs. The initial operating and maintenance cost given is 113,200 rupees at the end of year 1, which is converted into present worth using the present worth factor and then expressed as an EAC through the USCRF. The process involves several steps: calculating present worth using the P.W factor, summing costs, and then converting it back to an EAC. For instance, for the year 1 operating cost, the present worth is calculated as 98,438.72 rupees.
Following through similar calculations for year 2 and year 3, we find that the EAC for O&M costs also remains consistent in methodology with various factors leading to different annual costs for subsequent years.
Lastly, after finding the recycle value or salvage value at year 3 using the same methodologies, students learn how to aggregate these determinations to assess total costs structured as cash inflows and outflows to reach a final equivalent annual cost which helps in making decisions about machine replacement and economic life estimation methods.